Manulife US REIT Asks for Debt Extension, Sponsor Offers $236M Lifeline

Manulife US REIT (MUST) has unveiled a recapitalisation proposal involving a $235.7 million lifeline from its sponsor and a hoped-for one-year debt extension from creditors, in an effort to rescue the Singapore exchange’s most over-leveraged property trust.

The bailout includes the REIT’s sponsor, Canadian insurance giant Manulife acquiring an Arizona office asset from MUST for $98.7 million and extending $137 million worth of loans payable over six years, according to a bourse filing on Wednesday, while also asking 12 creditors to approve the 12-month debt reprieve.

As part of the plan, MUST’s manager says it will also attempt to sell more assets as well as halting distributions for two years to provide the REIT with greater headroom and further bring down outstanding obligations which had ballooned to more than $1 billion at the end of September.

“Overall, the recapitalisation plan demonstrates the sponsor’s and the lenders’ support, is an important step forward for the Manager to fund the liquidity needs of MUST and allows MUST  to deleverage to its optimal aggregate leverage level,” the manager said in the statement. “[It] also allows the manager to focus on its long-term plan of pursuing and executing a potential business pivot into assets that may offer better return potential going forward; secure long-term tenant demand; and be less capital intensive.”

Gearing to Stay Elevated

The REIT manager said it has “explored and exhausted various alternatives” to address both MUST’s maturing obligations as well as the sliding fair market value of its portfolio, and came to the conclusion that the recapitalisation plan is the “best workable solution.”

Manulife’s sponsor-lender loan to MUST would bear a 7.25 percent interest rate and an exit premium of 21.16 percent payable upon maturity, totalling $89.4 million in interest including the premium.

“Given the limited credit appetite for US commercial real estate, the equivalent of a sponsor-lender loan of $137 million would have been very difficult to obtain in the open market from an arm’s length third-party lender,” the manager said.

MUST is also divesting the 274,700 square foot (25,520 square metre) Park Place office campus along South Price Road in Chandler, Arizona, to John Hancock Life Insurance, a US subsidiary of the sponsor, which is expected to generate $98 million in net proceeds.

Together with the trust’s $50 million in cash on hand, following the transaction MUST will have $285 million available to trim its total indebtedness by 14.5 percent to $875.7 million.

The trust’s manager said it has also asked its lenders to extend maturities on all outstanding loans, which would remove all refinancing deadlines in 2024 and make May 2025 the next maturity milestone for the REIT. Of the trust’s 12 creditors, some have already agreed to the proposed debt restructuring.

Over the long term, the REIT identified three batches of assets which, if sold by June 2025 could raise $328.7 million or more to help pay down liabilities. Half-yearly distributions to unitholders will also be postponed until 31 December 2025.

The manager estimates that full execution of the recapitalisation plan would bring the trust’s gearing level down to 49.4 percent from 56.7 percent as of 30 June.

Falling Short of Requirements

While the recapitalisation plan gives unitholders hope for the trust’s survival, the proposal will not be sufficient to reduce MUST’s gearing to levels required under Singapore’s REIT code, according to Tan Qiuyi Charmaine, a research analyst at investment platform iFAST Financial.

Tan said the REIT must cut its gearing ratio to 45 percent or less, rather than Singapore’s typical 50 percent as set by its central bank, considering its high interest coverage ratio of 2.4x, referring to an indicator of the sufficiency of the entity’s income in covering interest expenses. Despite falling short of government targets, Tan sees the MUST proposal being accepted by investors.

“It is likely that unitholders would accept the plan as it would not be easy for MUST to deleverage,” Tan told Mingtiandi. “I would think the best strategy is to take up the recapitalisation plan and capitalise on offices that possess high occupancy rates (through) asset enhancement initiatives / rental reversions.”

“The risks in pursuing the proposed recapitalisation lie in whether and how fast MUST can pivot the business towards a healthier state upon receiving help from its sponsor and complying with the regulatory gearing limit,” she added.

Approval Needed

An extraordinary general meeting will be held on 14 December to seek MUST’s unitholder approval of the proposed recapitalisation, with lenders having until that day to provide their consent.

Should investors not accept the recapitalisation proposal at a 14 December meeting, the manager warned that lenders could demand accelerated repayment of the trust’s more than $1 billion in outstanding obligations, which would force the SGX-listed trust to speed up liquidation of its portfolio of 11 US office properties.

It said other options were not deemed viable for the REIT given the current business environment. Rapid disposal of assets remains challenging with the ongoing US office slump and with potential buyers still struggling with high interest rates and limited credit financing, the trust’s manager said.

MUST has been trying to climb out of its debt hole for more than 18 months while failing in three attempts at asset disposals since April 2022. The trust’s only successful divestment this year was the $33.5 million sale of the Tanasbourne office park in Oregon to its sponsor in April.

In May, it proposed the sale of the Phipps Tower in Atlanta to its sponsor, however, that deal later fizzled, with the trophy asset now listed as a potential property for divestment.

“Equity fund raising at the current unit price will be difficult given Manulife US REIT’s low market capitalisation,” the manager explained. “In terms of potential mergers, it was concluded that execution risks were elevated in this current market environment, and this option did not address the current issue of high aggregate leverage given that there would be no immediate capital injection.”

The manager said it has been unsuccessful in attempts to secure third party lending and efforts to work with debt advisors to identify sources of fresh credit had also proved fruitless.

The manager said it also reached out to more than 40 potential third party partners globally in an attempt to form “strategic transactions” that would reposition the REIT for future growth. A number expressed interest but they are also awaiting results of the recapitalisation plan, the company noted.

Last month, the trust welcomed Manulife Investment Management global head of real estate Marc Feliciano as its non-executive chairman.

Shares in MUST, which now has a market cap of $101 million, closed at $0.091 each on Tuesday, down 66 percent year to date. Trading of its shares remains halted following the announcement of the recapitalisation plan.